Dear Partners,
When you talk to successful entrepreneurs who have built, owned or sold successful companies they often describe a light bulb moment, when they had that insight, that spark, that led to them kicking off their journey. In my own experience, it hasn’t been that way, it’s been all a process, and it’s become clear to me that there are two reasons people get energized about entrepreneurship, one is passion for the problem, the second is the wish for prosperity, you give me one of those in an entrepreneur and I am ready to go to work, you give me both and I will have started already!
I love the start of a business, the zero to one phase is a special place. It’s a place I love to be and feel so comfortable in, maybe because I’m an introvert contrary to what most people might think. I love being one on one across a table with a CEO who wants to build something great, that’s my happy place. I have spent my whole career learning from my great mentors, Steve Ross, Mike Pascucci, Matt Higgins, Jon McNeill, and many others, who were all not just zero to one specialists, but zero to one, to scale. When Nadia was started it was started from a place of first principles, and that’s what I wanted to lay out here in our first of hopefully many annual letters.
When I first moved to the US in 2005 the macro environment factors were obviously important in business but I’ve certainly seen that every single year macro factors have had more influence over businesses every single day, 18 years ago, we had just come out of the remains of the dot com era, the internet was front and center, then followed the global financial crisis, followed by a bull market driven by a never before seen zero rate interest environment, into the pandemic and then the end of ZIRP, rising rates and a tech correction. Not to mention global geopolitical challenges, a handful of major conflicts, just enough to know one thing for certain, is that the macro environment will continue to be uncertain. In the US we have a major debt wall building and growing regardless of the politicians in place, no fiscal discipline, all of these factors lead to me to think through where is the right place to create enterprise value over time and also the reality is when your solving a customer’s problem and focused on the very long term the macro doesn’t really matter. We are long term patient and short term impatient.
After exiting my cyber security business I had spent a considerable amount of time and research thinking about what I wanted to spend my time on for the next 40 years. I did some investing, some good some bad, and couldn’t get comfortable with the venture capital structures where as they deployed capital they were confident that the “power law” would come good for their portfolio approach. To me, while I understand the benefits of the power law, what I couldn’t get comfortable with is investing in companies knowing that 90% are not going to work, while I get why it’s great when it works I simply haven’t met that many VCs with great returns for the stage of risk, and also there seems to be a ton of capital out there. Maybe I am hanging out in the wrong places to meet these VCs but I came to the conclusion that if I was going to lose money (which is certainly not my goal or plan), I would at least like to do that myself, betting on people who I truly believe in and in a process driven way where we could take all of my previous mistakes(too many to mention) and help other CEOs build great companies.
So maybe there is a better way? What would that look like?
When I was trying to land the plane on where I could get started and be competitive, I wasn’t an “investor”, I was a builder, and I do think I can hold my own with most people when it comes to starting a business, what’s important at the earliest stage, how to derisk it, and importantly when to invest and when to constrain. Next was to focus on passion and prosperity, my personal mission is to “unlock potential in others to make a difference in the world”. At some level I think everyone feels this way, so that was the passion box checked as I get great energy from unlocking the potential in other people as it was unlocked in me by so many. Secondly is the prosperity factor, one frustration I had when starting a company without a track record was the cost of capital, while the best businesses don’t need a lot of capital, it was certainly helpful when you think about the macro environment that was always uncertain and likely to continue, capital at times allowed you to fight to get to the other side of whatever challenges you had. One thing I wanted to rectify was having more ownership, both up front and along the way, how can you create a system of capitalization that allowed you to scale up your ownership over time. Finally I wanted to add partners who were builders and entrepreneurs more than people who were investors(no offense meant here!). John Halpin and Jack O’Connell are my two partners both who are accomplished business people in their own right but bring the capability and complimentary skills to the table that allows a CEO to feel comfortable that while something significant may get by one of us, it’s also unlikely to get by the three of us. I am blessed to be working with them both and they are the definition of growing our Collective IQ.
I remember my mentor Mike Pascucci used to say, “find a business in a sector that even if you were terrible at it you can still do well”, and as you study history, all of the major economic and societal breakthroughs have come from either a major shift in energy or technology, our thesis at Nadia is that the same trends are likely to continue. As it happens there are two very major shifts that are happening in both sectors right now, in energy, it’s the global decarbonization efforts that are happening and in technology, the AI revolution is at the beginning of the beginning. There is a lot of runway in both sectors, but we also see how being able to operate in both has led us to making better, more well rounded and informed decisions within our portfolio.
In terms of decarbonization, there has definitely been a shift driven by growing environmental concerns and the global imperative to reduce carbon emissions. Solar energy being abundant and increasingly cost effective, offers a sustainable alternative to fossil fuels, while battery storage technology is critical for solving the intermittency issues associated with renewable resources, enabling a more reliable and constant supply of power. We are focused on building companies that are supported by this trend in addition to the fact that governments worldwide are offering incentives for renewable energy adoption, signaling a supportive regulatory environment that will add to the growth potential of these sectors.
In terms of AI, while we may be in a mini bubble right now in some of the AI stocks both public and private, it’s hard to overstate how we see the opportunities for growth around AI, its more akin to the internet getting started than it is to the shift to cloud or mobile. It’s the first time that computing has been enabled through a language based input giving a machine based output. Some of the new use cases coming every week are at a breathtaking pace along with exponential improvements in each of these underlying platforms. As a firm we’re more focused on ways we can make money along the way, vs taking pure technology risk which we simply won’t do. Unlike traditional software businesses you need more than one moat, ideally we like to start with two and end with three and work off the assumption that some new technology will disrupt our plans regardless.
One of the major advantages with AI is being able to build enterprise ready companies for way less capital, leading to founders having the ability to bootstrap, or build with a little bit of capital, get to cash flow positive and go from there. Imagine that, businesses that made money! And the founders can own a lot of them. That’s what led us to the conclusion we want to be founders in the space, partner with great CEOs to build enduring large companies.
Once we have landed on our thematic areas and we are looking to kick off a process where we have to establish a check the box on each of our areas of due diligence pre launch, in reality they can be fluid in terms of research but we absolutely have to get them all in place or we can’t move forward.
Step one is a great CEO, this is by far the hardest part and the longest pole in the tent of our process. We are absolutely relentless in our pursuit of great CEOs and are truly blessed to be working with so many of them today. Without them we don’t have anything but together we have a powerful founding team. We have a pretty simple criteria that’s easy to describe but hard to find, we want the right combination of both energy AND experience, while its good to have one or the other when you have both you can “skip levels” of the game were playing against the competition, we supply this CEOs with a plan, infrastructure, investment to get them off the ground, then customers and advisors to allow them to focus on their own superpower, which usually is an empathetic position of some customer pain. As you might imagine, this process doesn’t happen easily or quickly and usually they come on board with us for a co-pilot of sorts to help us explore a business plan or idea we are working on. So we need them to have both energy and expertise and want to achieve prosperity or passion about customer pain, say that 5 times in a row quickly.
Step two is all about finding an unfair advantage, building companies is not for the faint of heart, you need all tailwinds you can get in your favor, through our experience we’ve learned and now understand that if we can really work and iterate to find an amazing unfair advantage or head-start in a business it can get CEOs activated quickly, customers engaged and signed early and all types of bright capable people who see what we see, and want to partner with us in some way. In my experience all unfair advantages have started and ended with a who, who is the CEO, who is the design partner, who has decided to invest alongside us and how is that going to help.
Step three is the customer step, have we really validated the pain that the customer has, is it a painkiller problem or just a vitamin problem, we are only in the painkiller business, for want of a better expression as someone with back pain! This piece literally never ends, every chance we get we are asking questions of experts in the relevant space testing and questioning our assumptions and watching for the inevitable ways we could get hurt.
The customer process is where the business either comes to life and takes off or it doesn’t work and we move on, I’ve seen a lot of businesses get built that are a solution looking for a problem, we stay focused on a problem statement that is crystal clear and a solution statement that is detailed enough to build a product but broad enough for a big market. The best way to get commitment from customers is simple, get commitment from customers, so that’s what we do, we prototype, we test, we get them to sign design partner agreements and then when the product is built they come on board as customers and as references for us. The most important validation is that someone is willing to pay.
Step four is the final criteria check, can we get this business to do $10M or more in ARR in 12-18 months, in fact this is probably the most important factor for us that leads us to get the final conviction that the business is worth spending time and energy on. Our biggest risk is not what we do, its opportunity cost, the definition of focus is deciding not to do something that you would love to or should do, this constraint limits our ability to do many things and only focus on business that can get big quickly in a very capital efficient manner. If we build large fast growing capital efficient and profitable businesses our life will be just fine.
As we look to the future at Nadia Partners, I just want to mention my deepest level of gratitude to all of the team we have, my partners John and Jack, and most importantly the CEOs who’ve joined us on this journey. I’m looking forward to sharing more.
Best,
Aidan Kehoe
Founder and Managing Partner
Nadia Partners